To all of our local Bay Area listeners, you may have heard about the recent story of a three-bedroom house listed for $488,000 in San Francisco’s Russian Hill with a tenant renting it for only $417 a month. How is that even possible?! If you’re as intrigued as we are, stick with us for this episode of Absolute Trust Talk, where we will be dissecting this situation with associate attorney Jessica Colbert. Listen in as we explore crucial lessons in trust management, the impact of California’s Prop 19 on property taxes, and the importance of updating estate plans as circumstances change. There’s so much wisdom to take away from this episode, so don’t miss out!
Time-stamped Show Notes:
0:00 Introduction
1:01 Here’s what we know about the situation around the San Francisco Russian Hill house listed for $488,000.
6:23 What happens to a family home after the homeowner dies can be a difficult thing to navigate. We suspect a few specific issues present in this unique case, including the potential for undue influence. Listen in as we discuss!
9:39 Next, Kirsten and Jessica discuss a few ways the grantor could have avoided the issues seen in the Russian Hill case.
11:47 Under Prop 19, homeowners can pass their homes down to their children without increased property taxes as long as the children make it their primary residence. If Prop 19 had been considered in this scenario, it could have prevented several issues.
15:04 If there is one lesson to take away from this episode, it’s this: When circumstances change, talk to your attorney about how it might affect your estate plan and adjust accordingly.
Transcript:
Hello and welcome to Absolute Trust Talk. I’m Kirsten Howe, and this is our audio and video podcast here at Absolute Trust Council. I’m here with our associate, Jessica Colbert, and it’s her first time on the show. Hopefully, she’s not too nervous. Our audience is very nice, so there is no reason to be nervous.
I was going to do this episode about some news I read in the Tony Bennett Trust administration for several reasons. First, I’m a big fan of Tony Bennett. Secondly, our audience really likes it when we do the celebrity estate planning episodes, and we like doing them. That was my plan. But we’re going to put that off because we have been hearing about a fascinating case right here at home in the Bay Area. We need to talk about it because there are a lot of lessons to learn.
My local listeners are guessing that I’m talking about a house in San Francisco on Russian Hill that recently went on the market with an asking price of $488,000, which is a lot of money. But in San Francisco, in that location, it is a ridiculously low price. That has gotten a lot of attention. People are talking about it. Jessica, do you want to fill in a few of the details?
Yes, what we knew about the house when it first went on the market is that it is a three-bedroom single-family home. The property was being sold as is. The prior owner had died in the house, and the house came with a tenant who had a lease for over 30 years, allowing the tenant to live in the house and pay rent of only $417 per month. Any buyer would not be able to move into this home, and the rent they would get would not come anywhere near covering the taxes, insurance, maintenance, and repairs that come with homeownership.
The homeowner’s insurance alone is close to $2,000 a year. The property taxes at this point—I don’t even know—are $20,000- $25,000 a year. So, $417 a month is not going to do it.
There’s a house a few blocks from where I live that is just falling apart, and I live in a nice enough neighborhood, but there are holes in the roof that are obviously visible from the street, the windows are broken, and there’s a big chain-link fence around the front yard surrounding the property. It’s been that way for several years, as far as I know. Whenever I see something like that, my first thought is always, “Well, somebody must have died, and now the family is fighting.” That’s what I thought when I first heard about this San Francisco house.
What we found out about a week or so after it went on the market is that, in fact, the property is owned in trust, the grantor of the trust – the person who set the trust up– his name was Kenneth, and he died in 2022 at the age of 102. He’s the person who apparently died in the house. And prior to his death, he had entered into a long-term lease. The lease expires December 31, 2053, almost 30 years from now. Into that lease, he is only charging the $417 a month.
The beneficiaries of this trust that own the house are Cheryl, Sandra, and Cedric. Now, Cheryl is, as I said, Kenneth’s daughter and also the tenant who’s entitled to live there for the next almost 30 years. Sandra is Cheryl’s mother and Kenneth’s stepdaughter. Sandra lives in the house with Cheryl. The third beneficiary is Kenneth’s son, Cedric, who is Sandra’s brother. Cedric, I don’t believe, lives in the house. I’ve not seen any reference to him living in the house.
So apparently, the other thing that we know about this situation is that this trust owns the house, and that’s pretty much it. There are no investments, no bank accounts, nothing like that. All of that money, those liquid assets, have been spent probably by Kenneth because he lived to be 102, and that’s a lot of years to be living off of your savings.
A few other things we know about this situation. The trustee of the trust is Todd. Todd is another one of Sandra’s children, in other words, a step-grandson of Kenneth, Sheryl’s brother. He’s the trustee of the trust, but he’s not a beneficiary. So, as the trustee, he’s the one who had to put the house on the market. Sandra apparently has been expressing unhappiness about the house being sold. She’s talked to the press. She doesn’t want the house to be sold. The house did get several offers pretty quickly—some of them over the asking price. And apparently, the trustee has accepted one of the offers. It was an offer at the asking price. And that buyer is Cheryl. So, she’s a trust beneficiary. She’s the one who has the lease allowing her to live in the house, and she is now offering to buy the house, and apparently, the trustee is going to sell her the house.
Now I know that the family home is often a big issue in our planning and a big problem after the homeowner dies. What are some of the issues you see here with this situation?
The family home often causes a lot of problems. The thing that jumped out at me first about this is that the plan that the grantor, Kenneth, set up, at this point, really the only way it can work is for the house to be sold because the income from the rent is so very low. It’s going to be like not even $5,000 a year. And the expenses associated with owning a house like that are way more than $5,000 a year. Without a bank account or an investment account for the trustee to use to pay expenses, it just isn’t going to work. Sandra may object to it, but really, the trustee has to do what the trustee has to do, and he’s going to sell it. And that’s the only way that this plan can work.
I know we’ve seen this before where a plan that worked when the grantor may have been much younger and there were a lot of liquid assets available to make it work, won’t work after many years of the grantor spending those assets.
Yeah, this is something that we have seen in our practice, so it’s really important to keep in mind that you’ve got to do the math from time to time and see if what you’ve planned out is actually going to work.
Another thing about this case that jumps out at me, and maybe that’s because I’m paranoid; I’m always looking for this, but it is the idea of undue influence. Remember what we said was this gentleman died when he was 102 years old, and just about a year prior to his death is when he made this arrangement with this long-term lease and the meager rental payments. And the arrangement, which is very favorable to Cheryl, he made at a time when, as I said, he was 101 years old. Cheryl’s living with him in the house, possibly very much involved in his care. I think the question has to be asked, was there any undue influence on Cheryl’s part to persuade him to treat her so favorably in his estate plan? I don’t see any evidence of that, but it’s a question that has to be asked. I don’t mean to disparage that family. Maybe everything’s fine, but it’s just a question that an attorney would ask in this situation.
How do you think that this plan could have been done differently?
Well, one thing that I’ve been trying to convince my clients to think about is what you want to make sure that a particular family member will have a place to live after you go. So, in this case, you could look at the facts and think Kenneth must have been concerned that Sandra and/or Cheryl would need a place to live if he died. And this long-term lease was his attempt to ensure they’d be okay.
But having a place to live and that kind of security doesn’t necessarily mean you have to have this place to live. A better plan would have been for the house to be sold after I died. And then Sandra gets a big inheritance, Cheryl gets an inheritance, and Cedric gets his inheritance, a much, much bigger inheritance than what they’re going to get now. Now, the house is being sold for $488,000. Without this lease standing in the way, it could be sold for $1.8 million. For the three of them to split $1.8 million instead of $488,000 would give Cheryl and Sandra quite a bit of money to buy another less expensive place or even live in an apartment and rent for many years. That’s a lot of money. I try to encourage people to, if possible, not treat the family home with such preciousness. It’s a place to live, and it is an asset, and it can be turned into money. So, think about that; I guess it is what I would say.
That’s a good point. Also, when talking about real estate in California passing from generation to generation, we have to consider Prop 19. How does that factor in here?
Yeah, Prop 19, that is a very good point. When Kenneth died, this was his primary residence. Under Prop 19, he could have passed his primary residence to a child or stepchild. And the property taxes would only go up if that child made the home their personal residence. He could have passed the home to Sandra, who was already living there, and she’s his stepchild, and the property taxes would have gone up. The report that I saw is that the assessed value before Kenneth died was about $143,000, and the assessed value was going to be over a million more than that after Kenneth died. You can only, under Prop 19, protect a million dollars of your low property tax basis, but it would have kept the property taxes quite a bit lower.
However, in this case, what the beneficiaries are getting would not entitle them to the Prop 19 protection of the property tax basis because of that lease. When Kenneth died, the property taxes went up to fair market value, whatever that would be. It will be in the $20,000 range per year based on what the property is worth. That’s not a good outcome. Even if Sandra and Cheryl stay in the house, they’re going to have to pay those taxes, and that’s a lot. That’s a lot of money. That’s a big difference. Kenneth was probably paying $2,000 a year or some really ridiculously low number. What I’m saying is he could have left the property just to Sandra. The property taxes would have stayed relatively low. Sandra would have had a place to live. She could have allowed Cheryl to live there, too, if she wanted to. And then she could have even, on her death, passed the house on to Cheryl. And again, parent-to-child transfer that’s okay under Prop 19.
So, if he was really concerned most about making sure those two had a place to live, he should have left the home to Sandra and kept the taxes low. That would have more or less guaranteed that Cheryl would inherit it after Sandra’s death.
Of course, this would mean that Cedric, Kenneth’s son, got nothing, and that might have been an unattractive option for Kenneth.
Yeah, that is a problem. When we try to preserve a particular asset, it becomes complicated, and it’s really hard to get everything that you want. Sometimes, estate planning is about making choices, and they could be better. You sometimes get only what you want.
Well, there are a lot of lessons here, but the one that really stands out and perhaps covers it is, when circumstances change, you need to talk to your attorney and your plan might change.
That’s right. When Kenneth started spending down all his assets, it completely changed how this was all going to work. It would have been a good idea to talk to his attorney and see what changes should be made. Good job, Jessica, for pulling that very important lesson out of this conversation. Thank you all for listening and watching, and we look forward to connecting with you next time.
Resources Related to This Episode:
- Absolute Trust Talk Episode 120: Solutions to Common Real Estate Issues: https://absolutetrustcounsel.com/120-real-estate-problem-solving-101-with-steven-kahn/
- Absolute Trust Talk Episode 067: Estate Planning Challenges with Real Estate: https://absolutetrustcounsel.com/067-estate-planning-challenges-with-real-estate/
- Absolute Trust Talk Episode 011: What’s Up With Real Estate in the San Francisco Bay Area?: https://absolutetrustcounsel.com/011-whats-up-with-real-estate-in-the-san-francisco-bay-area/
- A Will is Not Enough – Securing Your Legacy with Estate Planning Life can change in an instant. A will is not enough to be prepared. Get free access to our actionable E-book Guidebook #1 and start protecting your legacy today. https://absolutetrustcounsel.com/guidebooks/
- Learn how to comfortably define gray areas and assess your own unique needs to effortlessly build a secure future now. Check out Guidebook #2, Estate Planning Beyond the Basics, here > https://absolutetrustcounsel.com/guidebooks/
- Get our free introductory guide to the most used estate planning tool, family trusts, and understand how we plan to help protect your family. Guidebook #3: https://absolutetrustcounsel.com/guidebooks/
- Absolute Trust Counsel would love to offer access to our Incapacity Planning resource page: https://AbsoluteTrustCounsel.com/Incapacity-Planning/. We’ve collected our top planning information all in one place so listeners can find videos, guidebooks, blog posts, and a host of information with tips and strategies on implementing, planning, and protecting themselves and their loved ones.
- We’re pleased to provide a library of e-books to address common estate planning questions and concerns in practical, easy-to-understand language. https://AbsoluteTrustCounsel.com/Resources/.
- ASK KIRSTEN: If you’d like Kirsten to answer your question on the air, please email her at Info@AbsoluteTrustCounsel.com.
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